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Tax strategy withdrawing from 457(b)
Old 02-04-2013, 09:59 AM   #1
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Tax strategy withdrawing from 457(b)

Is there a way to take money out (shelter?) of my tax-deferred 457(b) plan before I hit age 70 and a half so that when I do reach that age I can minimize the taxes I'll have to pay?

I did some "what-if" calculations and wow, there looks to be a big jump in my taxes when the minimum distributions begin. I'm only 62 now so if there's something I can do over the next eight years I want to be doing it.

Thanks. I welcome all advice.
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Old 02-04-2013, 10:49 AM   #2
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A common strategy for people with large 401ks is to do annual Roth conversions between when they RE and when they turn 70 1/2 to reduce RMDs. It works where the marginal tax rate in the conversion years is less than the marginal tax rate projected to apply to the RMDs.

In my case I have no pension or SS during that time and should be able to convert a large chunk at favorable tax rates.

Not sure if this strategy could be applied to a 457(b) but it would be worth researching.
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Old 02-04-2013, 12:05 PM   #3
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Thank you. Let me see if I understand this correctly. I would take a chunk out now, pay tax on it now, and then convert it to a Roth IRA, right? So it isn't true that I can only contribute to an IRA with earned income from wages/salary? I thought I needed a salary to put money into an IRA.
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Old 02-04-2013, 12:37 PM   #4
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Quote:
Originally Posted by coolowl View Post
Is there a way to take money out (shelter?) of my tax-deferred 457(b) plan before I hit age 70 and a half so that when I do reach that age I can minimize the taxes I'll have to pay?

I did some "what-if" calculations and wow, there looks to be a big jump in my taxes when the minimum distributions begin. I'm only 62 now so if there's something I can do over the next eight years I want to be doing it.

Thanks. I welcome all advice.
You can take 457 money out without penalty after you quite the job that offers the 457. You can't avoid paying tax on any distributions, but you could rollover to a ROTH to spread the tax out over several years and reduce your RMDs. But if your tax bill will increase when RMDs begin you are lucky as that means that you are living well within your means.
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Old 02-04-2013, 02:01 PM   #5
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I guess I'd ask what your marginal tax rate is now, and what would you expect these RMDs to do to your tax rate. For example, if you are in the 15% bracket now and think you'd be in the 25% bracket with the RMDs, for, you could start withdrawing (or performing a Roth conversion on) as much as you could each year to "use up" the 15% bracket. That would lock in a lower rate on current withdrawals, reduce your RMDs in future years and reduce the amount of the distribution that is subject to higher tax rates.
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Old 02-04-2013, 02:38 PM   #6
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Quote:
Originally Posted by coolowl View Post
Thank you. Let me see if I understand this correctly. I would take a chunk out now, pay tax on it now, and then convert it to a Roth IRA, right? So it isn't true that I can only contribute to an IRA with earned income from wages/salary? I thought I needed a salary to put money into an IRA.
Yes, you got it. The amount is transferred from the 401k provider to your Roth IRA provider and you never "see" it.

The earned income limitation relates to Roth contributions but not to rollovers. On rollovers you can do as little or as much as you want to, it is just that you need to pay the tax because the amount of the rollover is treated as income.
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Old 02-04-2013, 03:09 PM   #7
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Yes, you got it. The amount is transferred from the 401k provider to your Roth IRA provider and you never "see" it.

The earned income limitation relates to Roth contributions but not to rollovers. On rollovers you can do as little or as much as you want to, it is just that you need to pay the tax because the amount of the rollover is treated as income.
Exactly.

In the January following each year you make a conversion you will receive a 1099-R to file with your taxes, and you'll need to pay the taxes due, so be prepared for that. You can estimate how much tax will be due by using your current year tax prep software before you make the conversion.
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Old 02-04-2013, 03:58 PM   #8
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Thank you all very much. I've learned a lot today and am eager to start plugging in some numbers to determine my optimum rollover amount.
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